Thursday, January 19, 2006

Corruption and growth

This excellent article by James Surowiecki details how the failure of Chicago-style economic liberalism in Bolivia has now lead to a dramatic political swing to the left. While free market economics delivered at the macro level, corruption and inefficiency at the micro level retarded growth to a mere 0.5% a year.

Neoliberalism failed in Bolivia because a macroeconomic checklist is not enough to make an economy work. Incorporating a new business in Bolivia, for instance, takes fifty-nine days, entails fifteen separate procedures, and costs twice as much as the average person earns in a year. So, according to a recent World Bank study, most of Bolivia’s businesses remain “informal,” which means that they have no legal protection, and limited access to credit markets. Corruption is rampant—a survey in 2000 found that it was a greater problem in Bolivia than in about ninety-five per cent of other countries surveyed.

I don't beleive that Bolivians turned to socialist market policy because they believe they will be particularly effective, I don't think they have a clear or well formed opinion one way or the other, I believe that they chose a populist because they believe the populist will be *uncorrupt and uncorruptable*.

The desire to be lead by someone *uncorrupt and uncorruptable* is part of human nature. The victims of the terribly destructive governments in Africa do not care whether they live under a free market or centrally planned economy -- they just wanted to be not killed and robbed from.

There was a news story on NPR this morning about the lobbying scandal that's currently in the US Press. No one on the call argued that the only way to take money out of politics was to take the politics out of money. They all longed for someone honest to come along, take charge, and do the right thing. A seperate NPR story in the afternoon discussed how Hammas is doing better than Fatah in Palestinian elections because they are seen as less corrupt. Fanatics in general rail against the corruption they see around them.

How to tackle the low level, endemic corruption that plagues third world countries is beyond me. It seems clear, though, that macro level Chicago-school prescriptions (privatize, reduce deficits, cut spending) do not deliver growth without micro level Chicago-school prescriptions as well (strong property rights, low real taxes, low nominal taxes). But imagine how invasive applying these prescriptions would be -- these countries would effectively need to have their civil administration run by others. Not that people do not implicitly choose to do this when they emigrate countries, of course.